Jeffrey Thompson
Board of Governors of the Federal Reserve System

Michael Parisi
Internal Revenue Service

Jesse Bricker
Board of Governors of the Federal Reserve System

Abstract

Measures of income concentration—such as the share of income received by the highest income families—may be biased by pro-cyclical volatility in annual income. Permanent income, though, can smooth away such volatility and sort families by their usual economic resources. Here, we demonstrate this bias using rolling 3-year panels of IRS tax records from 1997 to 2013 as a proxy for permanent income. For example, one measure of 2012 income concentration—the share of income received by the top 0.1 percent—falls from 11.3 percent to 8.9 percent when families are organized by permanent income instead of annual income. However, the growth in income concentration cannot be explained by this volatility, as growth rates are comparable in the permanent income and annual income groupings during our sample period. Further, the probability of remaining in the highest income groups, while relatively low at the very top of the distribution, increased slightly during our sample period, suggesting that top incomes have become less volatile in this dimension. These results are confirmed using household income data measured in the Survey of Consumer Finances (SCF)—a household survey with a large oversample of high-income households and a unique measure of permanent income.